You are a new financial analyst with Mason Products.
You will be evaluating two potential
investments, both with five-year expected lives and identical initial outlays of$110,000. The
required rate of return on both projects is 12 percent. The expected free cash flows from each
project are as follows:
In evaluating these projects, please respond to the following questions:
1. Why is the capital-budgeting process so important?
2. Why is it difficult to find exceptionally profitable projects?
To be "exceptionally" profitable, would indicate that the profit potential is clear, obvious, and
certain. And as such, you may be sure that millions like you will see it.
And as many of them have the
capital to jump in, you are left behind. Or, even if you
have capital, too, the volume of people trying to start the project decreases the profits.
Which is why there are so few "exceptional" profits.Try for a "good", or even a "modest" profit.